Port Phillip Fisheries Need a New Navigation System for Their

question 136

Essay

Port Phillip Fisheries need a new navigation system for their fishing boat.They have received three proposals,with related facts as follows:
$$\begin{array} { | l | r | r | r | } \hline & { \text { Proposal A } } & \text { Proposal B } & { \text { Proposal C } } \\\hline \text { Initial investment in equipment } & \$ 90000 & \$ 90000 & \$ 90000 \\\hline \begin{array} { l } \text { Annual cash increase in } \\\text { operations: }\end{array} & & & \\\hline \text { Year 1 } & 80000 & 45000 & 90000 \\\hline \text { Year 2 } & 1000 & 45000 & 0 \\\hline \text { Year 3 } & 45000 & 45000 &0 \\\hline \text { Salvage value } &0 & 0& 0 \\\hline \text { Estimated life } & 3 \mathrm { yrs } &3 \mathrm { yrs } &1 \mathrm { yr } \\\hline\end{array}$$
The company uses straight-line depreciation for all capital assets.
Required:
a.Compute the payback period,net present value,and accrual accounting rate of return with initial investment,for each proposal.Use a required rate of return of 14%.
b.Rank each proposal 1,2,and 3 using each method separately.Which proposal is best? Why?
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Definitions:

Profit-Maximizing

A business strategy focused on increasing profits to the highest possible level given the firm's constraints.

Wheat

A cereal grain that is a worldwide staple food, used to make a wide range of products including bread, pasta, and cereal.

Price

The amount of money required to purchase a good or service; determined by factors such as demand, supply, and production cost.

Shutdown Point

The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.